Russian coal is coming! Or is it?

The warning signs abound for the Russian Government: coal exports have fallen this year, Chinese coal imports have plummeted and renewable electricity is fast becoming the preferred source of new power. Even so, the Russian government seemingly remains determined to press ahead with policies and investments aimed at expanding coal exports and domestic coal-fired power production. How far will they get?

While Russia is the world’s sixth largest coal producer, the coal industry has had a chequered history since the political upheavals of the early 1990’s. The slump in the Russian economy after the fall of the Communist Party government triggered a dramatic fall in coal production. While the new government privatised many public assets, the publicly-owned coal mines were unprofitable even with heavy subsidies. After massive restructuring, mine closures and the elimination of subsidies, the coal industry was then progressively privatised.

The major expansion of the coal industry following the Second World War has imposed a heavy toll on the Russian people and environment. The environmental group Ecodefense notes that coal mines and power plants have created a legacy of health impacts from air and water pollution and companies have left extensive areas of un-rehabilitated mines.

After the downturn in the early 1990’s it wasn’t until the turn of the century that coal mines and power stations staged a revival, though with the same old problems of huge health and environmental costs. More recently the fossil fuel power generators have been privatised, and are now seeking to make a dramatic domestic comeback.

While two-thirds of Russia’s coal production is consumed domestically, it is also the world’s third largest coal exporter. However, the export in 2014 of 120 million tonnes of thermal coal and 22 million tonnes of metallurgical coal is not without huge logistical challenges.

Coal from the Kuzbass basin in central Russia – where over half the country’s coal is mined – has to be transported almost 4200 kilometres to reach European markets while it is even further to access the Asian market. With high transport costs – even though the publicly-owned Russian Railways makes a substantial loss – Russian coal has been at a competitive disadvantage to other exporters.

With Russia’s western coalfields a long way from the booming Asian market, the industry and government are now looking to develop the major coalfields in eastern Siberia and beyond. However, the eastern coalfields are in a sparsley-populated colder climatic region with limited transport and port infrastructure. With little local domestic electricity demand the only options for the development of these coalfields are for power exports to China or export via new ports.

Boomtime plans persist despite the bust

The Russian Government’s 2012 energy strategy reflected the fossil-fuel-centric boomtime exuberance which prevailed at the time. There were grand plans for a suite of new coal mines, a fleet of new ‘clean coal’ plants, upgraded railways, new coal export terminals and coal-to-oil plants. While the government signalled its interest in contributing to funding new infrastructure, the bulk of the cost of the projects would be reliant on private finance.

The government has grand plans for domestic coal consumption increasing by just under one-third by 2030, with most of the expansion at new coal plants near the border with China to enable the power to be exported.

The most prominent among these projects is the proposed 8000 megawatt (MW) Erkovetskaya power plant – with a with a price tag of up to US$25 billion – based on a lignite mine in the Amur region. If built, the plant would be the largest coal plant in the world and require a new 2000 kilometre-long transmission line to connect it to the Chinese grid. The project – which is proposed by the Russian company Inter RAO and State Grid Corporation of China – is currently subject to a feasibility study.

The government also hopes that by 2030 coal exports will be 45 per cent higher, reaching 170 million tonnes. While the bulk of the estimated expansion is expected to be for thermal coal, the government’s strategy also counts on more than a tripling of the higher-priced metallurgical coal, which is mostly used in steel making.

As part of its plan to facilitate increased coal exports, two new ports – with a combined capacity of 40 million tonnes a year – are planned in Primoriye Region, on the Russian Pacific coast near the border with China. However, the plans for coal terminals at Vera Port and the Sukhodol Bay port are facing uncertainty due to recent federal budget cuts and are likely to hinge on international funding. The Vera Port project has the Korean company Kowepo and Chinese company Shenhua as joint venture partners while the Sukhodol project is reportedly seeking international investment.

If the Russian government is unable to finance the projects, international investment will play a decisive role in determining whether or not they proceed.

However, the dream of a bigger Russian stake in the Asian coal boom faces considerable challenges.

The dramatic collapse of Chinese import demand and the rise and rise of renewables has shattered the hopes of many new high-cost thermal coal exporters. Even Tigers Realm Coal’s proposed metallurgical coal mines in the Russian Arctic – which is close to the coast with access to an existing export terminal – is floundering. (See ‘A Russian Arctic coal dream fades’.)

Despite this, the rebirthed Russian coal and power companies are also looking to become global players. In January the privately-owned Russian power company Inter RAO signed a memorandum of understanding with a provincial government in Vietnam for the development of the 1200 MW Quang Trach power plant.

Russian Railways has also trialled the export of Siberian coal to South Korean customers via the recently-upgraded Rajin port in North Korea. It has also entered into an agreement with Thai Banpu Public Company for the development of a coal railway and export terminal on the Indonesian island of Borneo.

When Russian Prime Minister Dmitry Medvedev unveiled a draft Energy Strategy for 2035 earlier this year, he soberly noted that “easy money will be harder to come by” even though the plan is premised on pursuing growth in exports of the country’s coal, oil & gas resources.

Medvedev cautioned that there were profound changes buffeting global energy markets that “we can’t afford to ignore.” “Energy revolutions,” he said, “come around every 50-60 years, bringing new types of fuel, which ultimately changes the playing field.”

As China’s coal imports fall and the Indian Government signals its intent to end imports within a few years, Russia’s global coal plans and export infrastructure may yet become the latest in a growing list of stranded assets.

Bob Burton is the Editor of CoalWire, a weekly bulletin on global coal industry developments. (You can sign up for it here.) Bob Burton’s Twitter feed is here.